Passengers struggling with overcrowded trains and delays on the Northern line due to the defective radio system will find it galling that the private companies maintaining the network are making very high profits.
London Underground boss Tim O’Toole has rightly highlighted the fact that the two infrastructure companies (infracos) made £93m between them in the first full year of the bizarre Public Private Partnership that has been foisted on the Transport for London by the government. O’Toole’s quote in the Financial Times today shows just how exasperated he is with the system. He said to the companies: ‘You are the ones who issue these press releases about profits. London will not put up with it.’
His sentiment is right, but unfortunately the reality is rather different. Londoners may just have to put up with it because that is what the contracts say.
The infracos have 30 year contracts, with breakpoints every 7.5 year, which pretty much guarantee them a rate of return of pushing 20 per cent, unless they make catastrophic mistakes – and even then they would probably manage to get off the hook through one of the many let outs in the contract as happened when the Central Line was closed last year for several weeks due to a derailment.
So when something goes wrong, like the radios on the Northern line, the contractors can usually say that it is not their fault because they inherited the problem in the legacy of a century old system. In fact, the radio system for the Northern dates from the 1990s when the guards were dispensed with and therefore the radio system had to be upgraded for safety reasons, but nevertheless, that still means it is an asset that the infraco has inherited.
The situation is further compounded by the fact that the contract for the radios is the responsibility of a different contract, Connect, which was a Private Finance Initiative deal created before the PPP. The trains, too, were bought under another PFI deal and the maintenance is in the hands of the Alstom, the manufacturers. Having so many different organisations involved is a recipe for disputes, legal arguments and inaction.
The basic premise of the PPP was flawed. Breaking up an integrated system like London Underground into several different companies was always going to be a mistake because when things go wrong, there will always be the excuse that they are someone else’s responsibility.
The PPP was always going to be a source of easy money for the infracos. During the lengthy letting procedure for the contract, the preferred bidders were chosen very early in the process and in the subsequent negotiations most of the risk for the companies was passed back to London Underground, which remains in the public sector. Yet, the rates of return which were calculated on the basis that they would be taking substantial risks, were left unchanged.
The generosity in the contracts therefore effectively guarantees high profits for the infracos. Moreover, the contracts. Basically, the bulk of the big commitments like new trains will not take place in the first 7.5 year period and therefore Londoners will notice few major improvements, apart from the odd station improvement, during that time.
Is not surprising, therefore, that the National Audit Office, which usually is very measured in its language, recently said that there was ‘limited assurance that the price of the three Tube PPPs was reasonable’, it meant that the infracos were getting a great deal at taxpayers’ expense. And so it is proving.